The United States Securities and Exchange Commission (SEC) has recently settled with crypto company Quantstamp over allegations of securities law violations. In the settlement, Quantstamp has agreed to a cease-and-desist order and will make a payment totaling $1,979,201 as disgorgement, along with a prejudgment interest of $494,314. Additionally, the company will pay a civil penalty of $1 million.
The allegations against Quantstamp stem from its Initial Coin Offering (ICO) conducted between October and November 2017. During this ICO, Quantstamp raised over $28 million by selling its native token, QSP, to nearly 5,000 investors, including U.S.-based investors.
The SEC argued that the QSP tokens should be classified as securities according to the Howey test, a significant regulatory criterion. It further stated that Quantstamp’s failure to register these tokens constituted a violation of federal securities laws.
The company’s ICO introduced an automated smart contract security auditing platform, which it claimed had immense potential. The SEC alleged that Quantstamp represented the success of its platform as a catalyst for a substantial increase in the value of QSP tokens. This portrayal influenced investors’ purchasing decisions.
The Howey test, a legal benchmark for determining securities transactions, consists of four elements: investment of money, participation in a common enterprise, anticipation of reasonable profits, and reliance on the efforts of others for those profits.
Quantstamp argued that it sought an exception from registering the QSP token offerings and sales because they were sold to foreign investors, making them exempt from federal securities laws. However, their actions were brought into question when they sold tokens to non-accredited investors in the United States, disqualifying themselves from the exemption.
